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Russia’s Economic Modernization: The Causes of a Failure September 2016 Vladislav INOZEMTSEV Notes de l’Ifri Russie.Nei.Visions 96 Russia/NEI Center
Russia’s Economic Modernization: The Causes of a Failure
September 2016
Vladislav INOZEMTSEV
Notes de l’IfriRussie.Nei.Visions 96
Russia/NEI Center
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How to quote this document:
Vladislav Inozemtsev, “Russia's Economic Modernization: The Causes of a
Failure”, Russie.Nei.Visions, No. 96, September 2016.
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Russie.Nei.Visions
Russie.Nei.Visions is an online collection dedicated to Russia and the other
new independent states (Belarus, Ukraine, Moldova, Armenia, Georgia,
Azerbaijan, Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and
Kyrgyzstan). Written by leading experts, these policy-oriented papers deal
with strategic, political and economic issues.
The author
Vladislav L. Inozemtsev is a Russian economist, Doctor of economic
science and the founder and director of the Centre for the Study of Post-
industrial Society (founded 1996). Between 2002 and 2012, he was Editor-
in-Chief of the journals Svobodnaia Mysl and Russia in Global Affairs, as
well as of the Russian version of Le Monde diplomatique. A professor at
Moscow State University (MGU) and the Higher School of Economics, he is
a non-resident Senior Fellow at the Institute for Human Sciences in Vienna
and at the Center for Strategic and International Studies in Washington.
He is a member of the Valdai Discussion Club and of the scientific council
within the Russian International Affairs Council (RIAC). He composed the
electoral programme for M. Prokhorov in the 2012 Russian Presidential
elections and took part in the 2011 State Duma elections with the “Pravoe
Delo” party. He is the author of 16 books and more than 400 articles in
scientific publications:
“Russia’s non-Soviet Path”, Aspen Review Central Europe, 2015, No.1,
p. 82–86;
“Yes, Sanctions Work”, The American Interest, March-April 2015,
Vol 10, No.4, p. 33-38;
“Russia of 2010s: How to Live with It and how to Outlive It”, DGAP
Kompakt No.7, Berlin, DGAP, June 2015, p. 1-9;
“Russia's Putin and Putin's Russia: How They Work and What We
Should Expect” in Hamilton, Daniel & Meister, Stefan (eds.) The Eas-
tern Question: Russia, the West, and Europe’s Grey Zone, Washington
(DC), Johns Hopkins Univ. Press, 2016, p. 93-108
Summary
In this short study of attempts that have been made in recent years to
modernize the Russian economy, the author explains why they have all
ended in failure. Unlike most experts, he focuses on politics and ideology.
He stresses that the idea of modernization runs counter to the historical
vision that is now propagated by the Russian leadership, to the system of
governance that it has chosen and to Russia’s current path of isolation from
the West. In his view, such political choices have rendered modernization
of the Russian economy unfeasible. The author also points to other
problems: the effects of privatisation, which have made investment in new
industrial facilities unprofitable, the declining quality of business leaders
who are chosen for their political loyalty and the lack of independent big
businesses that could insist on reforms being carried out.
Table of contents
INTRODUCTION .................................................................................... 5
HISTORICAL FACTORS.......................................................................... 7
ECONOMIC FACTORS ............................................................................ 9
FOREIGN POLICY FACTORS ................................................................ 12
THE RUSSIAN ELITE ........................................................................... 14
PUBLIC OPINION ................................................................................ 18
THE GLOBAL SITUATION .................................................................... 20
CONCLUSION ...................................................................................... 22
Introduction
Assessments of modern Russian politics differ widely: some reject Vladimir
Putin’s regime out of hand while others support it almost unconditionally.
This observation holds true not only in Russia but in most European
countries. However, when discussion turns to economics, the disagreement
disappears. The vast majority of specialists consider Russia as a relatively
backward country regarding the structure of its economy, which survives
mainly by exporting its natural resources and which is therefore critically
dependent on the state of world commodity markets.
Meanwhile, not only historians, but also politicians, entrepreneurs
and ordinary citizens, both in both Europe and in Russia, remember that
the Soviet Union was an economically self-sufficient country for a long
time. In Russia, the authorities have tried to remind people of late that they
ought to take pride in the industrial and technological pre-eminence that
their country once enjoyed. At the same time, however, it is becoming ever
clearer that Russia is in no fit state to make a new industrial breakthrough.
Despite all the talk about “overcoming the raw material curse”, the share of
oil and gas in Soviet/Russian exports has increased from 37% in 1989
to 43% in 1998, 58% in 2004 and 66% in 2013.1 Over the same period,
Russia has become increasingly dependent on imports, not only of high-
tech goods but also of everyday consumer goods, while its own industrial
production has declined.
Leaving aside most modern production and examining only crude
statistics for heavy industry, it turns out that 89 million tons of steel were
smelted in 1985 on the territory of the RSFSR, along with 79 m. t. of
cement, 18m T of fertiliser and 5m T of paper, while by 2015, these figures
had fallen by 20, 19, 11 and 10% respectively.2 The statistics for investment-
intensive production and relatively high-tech items for general
consumption are even more woeful. Between 1985 and 2009, the number
of lorries, combine harvesters and tractors manufactured in Russia
Translated from Russian by Cameron Johnston.
1. V. Inozemtsev: “10 tsifr, kotorye ob’iasniaiut Rossiiu” [10 Figures which explain Russia], Slon,
17 September 2015, www.slon.ru.
2. Calculated using: Narodnoye khozyaystvo RSFSR v 1985 g, [Economy of the RSFSR in 1985],
Moscow, Ed. Finansy i statistika, 1986 and Rosstat data: www.gks.ru, website visited on
17 May 2016 (since 2010, data on the production of watches and cameras has not been published).
http://www.slon.ru/posts/56555http://www.gks.ru/
Modernization of the Russian Economy Vladislav Inozemtsev
6
decreased 6, 14 and 34 times, while production of watches and cameras fell
by a factor of 91 and 600 respectively.3 According to official data from the
Ministry of Industry and Trade, 45 classes of items were entirely sourced
abroad in 2014, while imports accounted for more than 90% of a further
200 types of goods.4 To conclude, it is worth noting that Russia is even
losing ground in the field of energy: by the end of 2014, its share of world
oil and gas extraction had fallen to 12.6% and 16.7% respectively, compared
to 17.8% and 29% in 1989.5
The Russian leadership is constantly referring to the need to
“overcome technological gap”, “reindustrialise” and “get off the oil needle”
but in fact, no serious attempts have been made to stop the rot. In 2008,
then-President Dmitry Medvedev insisted that modernization was his top
priority: but the reform programme and the various milestones were set up
in such a way that it was clear from the beginning that nothing would come
of all the hype.6 In countries which have succeeded in modernizing, the
process has moved “from simple to complex”, with entrepreneurs, workers
and engineers gradually acquiring new skills and inserting themselves into
new markets. In Russia, by contrast, they decided that the “breakthrough”
would mainly be made in complex fields, and in the ones that are largely
insulated from the free market, such as nuclear energy, space technology
and pharmaceuticals. Even in the unlikely event that they blossomed, these
fields could not kick start large-scale economic growth across the country.
It was no accident that modernization under Medvedev failed or that it
disappeared almost completely from the agenda after Putin’s return to the
Kremlin. Rather, this was caused by at least six sets of factors related to
history, economics, foreign policy, the global situation, society and the
elites.
3. V. Inozemtsev, “Nineteen Eighty-Five”, Russia in Global Affairs, 8(4), October-December 2010,
p. 9.
4. See: Rosbalt, 16 April 2016, www.rosbalt.ru.
5. Calculated using BP Statistical Review of World Energy 2015, British Petroleum, June 2015,
www.bp.com.
6. For more details, see: V. Inozemtsev and E. Kuznetsova, “Modernizatsiia po ostatochnomu
printsipu” [Modernising with what is left over], The New Times, 18 January 2010,
http://newtimes.ru.
http://www.rosbalt.ru/https://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2015/bp-statistical-review-of-world-energy-2015-full-report.pdfhttp://newtimes.ru/stati/others/40da8535ccafdf64bca8c8b888e92817-modernuzacuya-po-ostatochnomy-pruncupy.html
Historical factors
The fundamental difference between Russia and most successfully
industrialised countries is that Russia had already been a great industrial
power. Almost everywhere in the world (in Japan, Korea, China, Malaysia
and so on), modern industrialisation was a way of overcoming the
economic processes of an agrarian society and it happened once, never to
be repeated. Even in China, which experienced several waves of
industrialisation, the industrial revolution of 1980 to the 2000s began in a
predominantly agrarian country, although it contained pockets of heavy
industry. Russia confronted an unusually difficult task at the dawn of
the 21st century: how to industrialise anew when the 1920s and 1930s had
destroyed traditional society under the slogan of industrialisation, and
after Russia had become the world leader in certain sectors and products in
the 1960s and 1970s. In these circumstances, the challenge of
industrialising runs up against three main obstacles.
First, it runs against the grain of public discourse and undermines
people’s sense of themselves as citizens of a great country and a mighty
industrial power. It is notable just how much attention the government
pays, for instance, to supporting the defence sector or big national
industries. This approach suggests that everything is going fine with
industrial development and that state policy in recent years has helped it
take a turn for the better. Any attempt to dispel this myth is anathema to
the elites who are invested in Russia’s so-called “stability” and who talk up
the superiority of Russian and Soviet societies. The task of industrialising
of a industrialized economy is transformed into an oxymoron. This
problem is not unique to Russia: the 20th century abounded in unfinished
modernizing projects that “backfired”, making societies unreceptive to new
modernizing initiatives (Latin America was particularly prone to this
throughout the 20th century) and leaving them in a state of either
permanent stagnation, as in Argentina, or prolonged depression, as in
Venezuela.
Second, in the mind of Russians, industrialisation is strongly
associated to the worsening conditions for the population. Whenever rapid
industrial development has occurred in Russian history, the powers that be
have destroyed the existing patterns and rhythms of everyday life. From
Peter the Great to the communist leaders, industrialisation has involved
deprivation and harnessing all the power that society can muster. This is
Modernization of the Russian Economy Vladislav Inozemtsev
8
only natural: successful attempts at modernization have nearly always
implied restrictions on current consumption and tight regulation by the
state. Simply by examining those Asian countries where, in the first decade
of their modern industrial revolution, real incomes barely rose, it is clear
that this policy would not be supported by the current Russian
government, whose popularity is based on lavish hand-outs, not on the
ability to mobilise the masses for economic transformations that inevitably
entail deprivations. As a great social project, industrialisation is
incompatible with political “stability”: remember that all attempts at
authoritarian modernization have ended, sooner or later, in radical
political change.
Third, a certain type of “historical memory” plays an important part in
setting the parameters for a potential industrialisation drive, rendering it
pointless from the very beginning. In the Soviet Union, industrial
development occurred within a planned economy that always paid little
attention to efficiency as traditionally understood. The country reached a
dead end at the time largely because it tried to “tame” nature and territorial
distances, to pull back manufacturing into the most inaccessible locations
where it would never have developed had there been a market economy.7
And if we look today at what “industrialisation” and “modernization” really
entail, we see almost exactly the same unrealistic projects: from the bridge
to Sakhalin and the tunnel under the Bering Strait to the modernization of
the Baikal-Amur Mainline (BAM) and the construction of the Power of
Siberia pipeline. If you have already experienced one unsuccessful
industrialisation, it is also too easy to repeat the same mistakes a second
time round. The more authoritarian the government, the more likely this is
to happen.
Russia therefore presents a very unfavourable environment for
industrialisation; the doubtful experience of its earlier industrial
revolutions (none of which was natural) exists alongside a certain nihilism,
which springs from the illusion that Russia is well versed in these matters,
and is reinforced by the authorities’ unwillingness to destabilise society. All
this demonstrates that in terms of history, ideology and worldview, Russia
currently possesses none of the prerequisites for a new round of
industrialisation.
7. C. Gaddy and B. Ickes, Bear Traps on Russia’s Road to Modernization, London/New York,
Routledge, 2013, diagram No.3.1, p. 38.
Economic factors
The second set of obstacles, quite diverse, is due to economic factors,
although all these are of course connected to political factors and “the
specificities of the national elite”.
First, the most important barrier on the road to successful
industrialisation in Russia is the privatisation that took place in the 1990s.
Privatisation allowed the new owners to gain control of large assets at very
low prices (51% of “Norilsk Nickel” was bought for $170m, 51% of
“Sidanko” [later—TNK] for $130m, 51% of “Sibneft” for $100m, 40% of
“Surgutneftegaz” for $89m, while many large industrial enterprises were
acquired for a few million dollars). The problem here is not that the state
was short-changed during privatisation but that the foundation of the
economy in the 2000s was made up of assets that were virtually given
away, with their cost being recouped in just a few years. This acted as a
powerful brake on investment: every potential investor realised that he
would have to spend billions of dollars to compete with those who had
acquired their assets on the cheap. Surviving in this environment
demanded the most up-to-date management techniques and by no means
all managers possessed them. Privatisation, in other words, having been
carried out in the interests of the oligarchs, continues to influence
economic strategy two decades down the line, discouraging new players
from investing in industry (it is not surprising that only one new oil
processing plant has been built in the “energy superpower” since the
collapse of the Soviet Union). China, whose industrial revolution has been
overall successful, took a different path by keeping the industrial giants
under state control but sponsoring the creation of new companies that play
by market rules.8 This helped to unleash entrepreneurship in industry, as
opposed to killing it in embryo.
Second, from the beginning, no strategy was devised for rapid
industrial growth and no one therefore posed the question of what might
underpin such a strategy. Across various historical epochs, stimulating
economic growth in developing countries has generally come in two forms:
heavily redistributing resources from one sector to others (like Stalin’s
industrialisation, which ruined the countryside), or artificially depressing
8. For more details, see: H. Sheng and Z. Nong, China’s State-Owned Enterprises: Nature,
Performance, and Reform, Singapore, World Scientific Publishing Co., 2012.
Modernization of the Russian Economy Vladislav Inozemtsev
10
the price of certain resources (labour in China or other South-East Asian
countries, for instance). Russia possessed two relatively cheap resources
after the collapse of communism, namely qualified workers and natural
resources. This meant that it was quite possible to carry out a “new
industrialisation” but the government did not even consider using either of
these resources on the cheap. Supplying the economy with cheap raw
materials might have attracted foreign investment and allowed industry to
thrive but the government was hand-in-glove with the oligarchs who
controlled the raw materials and derived most of its income from
redistributing natural-resource rents. It also needed the support of the
masses and therefore bought their loyalty by increasing people’s incomes.
The ability to improve the well-being of unproductive groups by simply
redistributing income from the extraction and export of raw materials
became the foundation of the Russian economy, but this did nothing to
develop manufacturing or shift the main burden of tax onto industry. To
put it more simply, instead of forcing the people to work, using cheap
Russian raw materials and accessible foreign technology, the Russian
government preferred instead to redistribute the proceeds from raw
materials directly. As one might expect, this enriched state employees and
raw material barons, but removed the incentive for investors to develop
production in Russia. Time and again, the authorities gave their seal of
approval to monopolies that, at times, sold Russian raw materials at higher
prices at home than abroad (when the Federal Anti-Monopoly Service
sanctioned the creation of United Company RUSAL in 2007, one condition
was that the price for aluminium on the Russian market should not exceed
that on the London Metal Exchange by more than 5%).9 Needless to say,
the Chinese economic miracle was not repeated in Russia. Indeed, it has no
chance of being repeated because, at a time of instability on world markets,
owners of raw materials will try to increase the valuations of their
companies within the country, driving down competitiveness even further.
Meanwhile, the environment for doing business in other countries will only
improve.
Third, the Russian economy has developed and is still developing
along relatively autarchic lines. It exports unprocessed raw materials and
imports ready-made, high-tech goods. As such, industrialisation is seen
almost exclusively as a way of reducing Russia’s dependence on foreign
goods—that is, the “import substitution” that is now so popular—but no
more than that. In recent years, Russia has the distinction of being the only
country where “free economic zones” were set up to increase the supply of
9. K. Rybak, “FAS dast dobro ‘Rusalu’” [FAS will give green light to Rusal], Vedomosti,
18 January 2007, www.vedomosti.ru.
http://www.vedomosti.ru/newspaper/articles/2007/01/18/fas-dast-dobro-rusalu
Modernization of the Russian Economy Vladislav Inozemtsev
11
goods on the internal market (like, for example, the free economic zone in
Kaliningrad oblast) and not for export, as is the custom practically the
world over.10 This gives rise to a problem that was identified long ago by
the American economist Jagdish Baghwati: modernization cannot succeed
in closed economies because autarchy restricts competition, while any
“new industrialisation” requires greater competitiveness: the statistics bear
out his conclusion that the key to industrialisation is integrating a national
economy into the world economy.11 In Russia today, there are no markets
big enough to absorb enough industrial output to guarantee economies of
scale and such markets will not appear in the near future (for this reason,
projects like “Yo-Mobile”12 have not and will not see the light of day). The
only way to reindustrialise the country, therefore, is to attract foreign
manufacturers that own wide sales networks and to increase exports of
ready-made items bearing well-known global brands. However, as we
already know, the Russian government believes that the country is
surrounded by enemies and is shaping its policies around the idea of yet
more autarchy. With Russia’s rapidly shrinking internal market and with
hopes of a change in political course proving illusory, we can be almost
certain that attempts at industrialisation will fail. In addition to economical
factors, foreign policy factors are no less important.
10. V. Inozemtsev, “Khimery razvitiya. Pochemu provalilsia eksperiment osobykh
ekonomicheskikh zon” [Chimeras of development. Why the experiment with special economic
zones failed], Slon, 27 June 2016, https://slon.ru.
11. J. Bhagwati, In Defense of Globalization: How the New World Economy Is Helping Rich and
Poor Alike, Oxford/New York, Oxford University Press, 2004, p. 180.
12. A Russian project for a hybrid vehicle with an electrical transmission.
https://slon.ru/posts/69600
Foreign policy factors
Foreign policy accounts for a third set of obstacles, the most important of
which is the character of Russia’s relations with its closest ally.
Contemporary Russian foreign policy will not be analysed here,
though it is highly detrimental to the country’s economy and runs against
the grain of modernization. One factor, however, should be highlighted.
Every successful attempt at modernization in the modern world has
required partnership with a country that is not only politically well
disposed but also acts as the biggest market for its partner’s industrial
production and as the prime source of the investment and technology
needed for rapid development. If, in the USA and EU countries, the share
of exported industrial production accounts for no more than 8-9% of GNP,
in China in the mid-1990s this figure reached 21%, in Indonesia 22%, in the
Phillipines 24%, in South Korea 27%, in Thailand 30%, in Taiwan 43% and
in Malaysia 78%.13 In the 1980s, 42% and 74% of the economic growth
experienced by South Korea and Taiwan respectively was sustained by
exports to the United States.14 At the same time, American imports
accounted for nearly 85% of the positive side of Mexico’s balance of trade.15
Having a partner like this is a determining precondition for successful
modernization.
Russia, however, does not have such a partner. Having turned away
from Europe—whose market is now the reference point for the successfully
industrialising countries of the former Warsaw Pact—for purely political
reasons, Russia turned towards the largest industrial economy in the
world, China, which has no interest at all in Russia becoming a competitor.
A whole raft of evidence backs up this view: since the first half of the 1990s,
China has progressively reduced the proportion of industrial goods in its
imports from Russia, while increasing the proportion of unprocessed raw
materials (the former has now fallen below 3% while the latter has reached
75%, exceeding the corresponding figure for trade between Russia and the
EU). China is the main potential consumer for Russian oil and gas
13. M. Goldstein, The Asian Financial Crisis: Causes, Cures, and Systemic Implications,
Washington D.C., Institute for International Economics, 1998, p. 27.
14. L. Thurow, Head to Head. The Coming Economic Battle Among Japan, Europe and America ,
New York, Warner Books, 1993, p. 62.
15. R. Reich, Tales of a New America, New York, Vintage Books, 1988, p. 56.
Modernization of the Russian Economy Vladislav Inozemtsev
13
extracted in Eastern Siberia and the Far East but, despite the Russo-
Chinese “programme of cooperation” adopted in 2009, Russia has failed to
convince its partner to build even one enterprise on Russian territory that
can process raw materials from start to finish. In the same way, we are not
seeing a boom in Chinese investment in industrial facilities in other parts
of Russia. The lesson is clear: successful industrialisation requires close
trading and investment links between the industrialising country and a
state or several states at a much higher level of development, which regard
it not as a competitor but either as an addition to its own economic systems
or as an opening for significant investment and technology transfer.
The alliance between Russia and China, or, to put it more accurately,
Russia’s following of China’s trajectory, is not based on such cooperation.
This is almost the only case in the world when a leading (or, at least, larger)
economy is not interested in developing its satellite and cannot offer
anything to help that satellite move forward quickly. The most that China is
capable of is to promote quantitative growth in the Russian economy
without structural change. This begs the question of whether economic
issues are at all important to the Russian elite when charting a course in
foreign policy and choosing allies on the world stage. Positioning in foreign
policy and the choice of allies is clearly another obstacle on the road to a
“new industrialisation” of Russia.
The Russian elite
The fourth set of problems is directly bound up with the defining features
of the Russian political elite and with Russian bureaucrats as a class.
First, this elite is a “raw materials elite”, focused on maintaining
control of its own sector of the economy, extracting as much revenue as
possible for the budget and redistributing budget flows. It should be noted
that this is not a “timeless characteristic” but a new phenomenon that can
be traced back to the start of Putin’s presidency. A catastrophic mistake
was made in 2002 which set this process in train, namely the introduction
of the Minerals Extraction Tax and a new system of export duties: from
that time onwards, the state bureaucracy and the oligarchs who controlled
the raw materials began to merge, while the idea of a “rent economy”
appeared for domestic consumption and the “energy superpower” for the
wider world. It was the Putin period of Russian history that witnessed the
most dramatic rise in the share of Russian exports made up of “mineral
products”, from 54% in 2000 to 72% in 2013.16 When oligarchs and state
officials are one and the same, of course, it is difficult to promote the idea
of industrialisation which, one way or another requires that the oligarchs’
appetites be curbed. In essence, the very idea of an “energy superpower”
implies that, under the current leadership, industrialisation and
modernization cannot be regarded as anything other than fiction or cheap
propaganda, if only because it is impossible to industrialise the country
without stepping on the toes of representatives of the raw materials
companies.
Second, this elite is “attached” to the Soviet Union, not in terms of
ideology or intellectual calibre but with respect to the material assets that
underlie its wealth. Seventy four of the largest 100 Russian firms by market
capitalisation work almost exclusively with fixed assets dating from the
Soviet era (for comparison, 14 of the 30 companies that now make up the
Dow Jones Industrial Average were not part of it the last time it was
revised in Soviet times, on 6 May 1991), while only 4 of China’s 100 largest
companies by capitalisation are critically reliant on productive capacity
16. Rosstat data issued from www.gks.ru..
http://www.gks.ru/
Modernization of the Russian Economy Vladislav Inozemtsev
15
brought on line 25 years ago or more.17 The elite’s unwillingness to
countenance change is therefore understandable, for the greater the
changes, the higher the risks for old companies that are sure to lose out in a
competitive contest. Industrialisation does not figure in the Russian elite’s
plans, not only because it calls into question the role of the raw materials
sector, but also because it entails greater competition in industry as a
whole. This explains the generally negative attitude towards foreign
investment in industry: since the 2000s, when it guaranteed basic
standards of production in a range of sectors focused on the consumer
market, the flow of inward investment has almost dried up.
Third, the Russian bureaucratic machine is constructed in such a way
that corruption is not a by-product, but its main motive force. The
effectiveness of the “vertical of power” in modern Russia relies on the
“vertical of corruption”.18 Corruption on such a huge scale, however, is
incompatible with industrial development, for two reasons. On the one
hand, the cut that state employees are prepared to take increases as the
state grows stronger, but if these bribes come not from redistributing rent
but by extorting money from industry, the latter quickly becomes
uncompetitive (for instance, corruption has made building roads and
infrastructure so expensive that it has all but stopped). In today’s Russia,
the official tax burden on business is similar to that in developed countries
but considering that corruption increases that burden by at least a third, it
is clear that only the most monopolistic of firms can survive in such an
environment, which is toxic to rapid industrial development (the mass
creation of state corporations supports this view). On the other hand, the
bureaucracy must have a pretext to engage in corruption and in Russia, it
finds these grounds in regulation: the more rules and norms that
businesses must follow, the easier it is to keep them “under the thumb”.
This is why 1970s-era technical regulations and standards are still in force
in Russia. There is no willingness to adopt regulations that would accord
with those used in Europe or OECD countries while over the past five
years, taxes have been supplemented or changed once every two weeks, on
average. The problem here is that the competitive industry should update
its product lines fast enough that is impossible with the shifting
regulations. By building its “vertical of power”, therefore, the political elite
has knowingly condemned Russia to being a mere supplier of raw
materials.
17. For more details, see: V. Inozemtsev, “Chto tyanet nas obratno v SSSR? Ne FSB i ne ‘Edinaya
Rossiya’” [What is pulling us back into the USSR? Not the FSB and not ‘United Russia’”], Slon ,
20 May 2015, https://slon.ru.
18. For more details, see: I. Krastev and V. Inozemtsev, “Putin’s Self-destruction”, Foreign Affairs,
9 June 2013, www.foreignaffairs.com.
https://slon.ru/posts/51710http://www.foreignaffairs.com/articles/139442/ivan-krastev-and-vladislav-inozemtsev/putins-self-destruction
Modernization of the Russian Economy Vladislav Inozemtsev
16
Fourth, developed industrial enterprises have always been, and still
remain, places where relatively well organised workers gather together: the
modern workers’ and trade unions’ movement was born with the rise of
industry for the simple reason that industrial production was a collective
enterprise. The political elite in Russia is able to manipulate society
because it is divided, while its strategy generally rests on suppressing
collective action as much as possible.19 There is abundant evidence that the
Russian authorities are wary of any sign that an independent trade union
movement might be in the offing and they are hostile to any form of
professional solidarity. This, then, is yet another reason (not the main one
but important nonetheless) why the idea of rapid industrialisation is
discounted. History—in the case of, say, South Korea or Taiwan—clearly
shows what fate lies in store for members of the ruling elite when
industrialisation leads to the creation of a strong and independent middle
class (in Russia, the middle class currently consists largely of state
employees), the development of democracy and the advent not only of
economic, but also of political, competition. This helps to explain why
modernization is not on the agenda in Russia today.
Fifth and finally, another obvious factor should be noted. Over the last
decade, Russia’s elite has evolved by “negative selection”, with competence
sacrificed in the name of loyalty.20 Although this allows the elite to feel that
it is insured against change, it sharply undercuts efficiency, which is crucial
for industrial development. It would be no exaggeration to say that modern
Russian politics neglects efficiency in favour of stability. This approach is at
odds with modernization (and industrialisation as its most important
component), which promotes efficiency as the ultimate objective and
attach less importance to other considerations. In modern Russia, shifting
the emphasis onto efficiency is taboo for politicians and state servants who
are unused (and most of whom are unable) to working in an environment
where efficiency is the main yardstick by which their actions are judged.
Therefore, the system will almost certainly sacrifice industrialisation and
efficiency, preferring to keep the old hierarchical structure of governance
intact.
We could also discuss at length such weighty problems as official
accountability, the transparency of contracts and the absence of a truly
19. V. Inozemtsev, “Russie, une société libre sous contrôle autoritaire” [Russia, a free society
under authoritarian rule], Le Monde diplomatique, October 2010, No.10, p. 4-5, www.monde-
diplomatique.fr.
20. V. Inozemtsev, “Neo-Feudalism Explained”, The American Interest, March-April 2011, Vol. 6,
No.4, p. 73-80, www.the-american-interest.com.
https://www.monde-diplomatique.fr/2010/10/INOZEMTSEV/19776https://www.monde-diplomatique.fr/2010/10/INOZEMTSEV/19776http://www.the-american-interest.com/2011/03/01/neo-feudalism-explained/
Modernization of the Russian Economy Vladislav Inozemtsev
17
independent legal system. All these factors are crucial, but they have been
amply explored before.
Public Opinion
The fifth set of problems which reduces the likelihood of modernization in
Russia to near zero is the unprecedented state of public opinion in Russia
(diligently cultivated by the authorities), which prevents reforms from
being launched.
History shows that for modernization to be successful, both the
elites and the people must recognise that the current state of affairs is
unbearable and that it must change. Change involves analysing earlier
mistakes and understanding that modernization is about catching up with
countries that have been more successful and have pulled ahead. The very
notion of “modernization” can be understood as “bringing up to date”, and
it therefore partly implies that the country is currently on the decline.
Without this awareness, modernization cannot succeed, since it can only
yield temporary achievements that are easily dismantled as soon as the
course of politics changes. Russia is an anti-model in this respect: each
century, it tries to modernize at least once, only to start discussing a new
round of modernization. The explanation for this recurring pattern lies in
the fact that the elites do not understand why modernization is needed and
the people feel that they have no stake in it. Successful modernization
occurs where the authorities decide that they must break with the past and
face the future, while also knowing how to excite the people’s interest in the
changes ahead. Lee Kuan Yew in the 1960s, Den Xiaoping in the 1980s and
Fernando Cardoso in the 1990s embodied precisely this strategy.
Moscow has taken the polar opposite approach on both counts. The
authorities, having bowed to populism, are unable to admit that the
situation in Russia is bordering on catastrophic (on the contrary, they say
that the country has “risen from its knees” and will be outstripping its chief
opponents in no time). This alone is enough to discredit modernization. On
the ideological level, moreover, the elites are busy searching for a line of
historical succession that would connect them to the Soviet Union, whose
positive image is becoming the main tool of official propaganda. Of course,
if you convince the people that they will soon reach an ideal state, what
sense does it make to talk about modernization? Why strike out into an
unknown future when it is much simpler and more comprehensible to
recreate the past? Populism, moreover, involves focusing on the
distribution of goods and the paternalistic role of the state, whereas
modernization always entails huge investment and certain restrictions on
Modernization of the Russian Economy Vladislav Inozemtsev
19
the growth of consumption. Therefore, the government’s unwillingness to
demystify the past and the people’s unwillingness to restrict current
consumption for future benefit constitute the last, but most important,
reason why modernization will not receive wide support in Russia, either
now or in the near future.
The global situation
Finally, the sixth set of reasons, which stood out in sharp relief after the
latest attempt at modernization had failed, is connected to changing
economic outlook in Russia and the world. Oil prices fell sharply in 2014,
leading to a decline in export revenues and a dramatic weakening—nearly
twofold—of the rouble. As the experience of various different
modernization drives shows, success depends on either large-scale imports
of technology and equipment, if the goal is to increase exports, or active
capital investment on the part of foreign companies if they are intent on
capturing the country’s market. In today’s Russia, neither condition
applies.
First, the government must ensure that it can cover its budget
expenditure, even though expenditure this year is 10-15% lower than
planned, and pensions, which accordingly the law should be indexed at the
rate of inflation, have risen by only 4%, while inflation runs at 13%. A weak
rouble is therefore in the state’s interest because export duties on oil and
gas, which make up close to a third of budget income, are denominated in
dollars. The weaker the currency, the more roubles flow into the budget.
From the point of view of modernization, though, this trend is ruinous
because over the last two decades, most of the equipment needed to
improve production was bought abroad, so when the rouble falls, it
becomes unfeasible for companies to make such investments. All the
attempts at “import substitution” are unrealistic: Russia is decades behind
in producing modern industrial equipment and what it does produce is
often even more expensive than the imported versions. Theoretically,
therefore, Russia could only have modernized when the price of oil was
high. However, when the going was good, no one even considered it.
Second, in the past, an alternative driver of modernization might have
been investment by Western companies in production for the domestic
Russian market. This occurred on a limited scale in the 2000s when new
car factories were built by western corporations. They were interested in
Russia because of the size of its internal market (it was said that Russia
would be the largest market for cars in Europe by 2016)21 and its isolation
21. Based on projections made by Boston Consulting Group in 2013, see: D. Nizhegorodtsev,
“V 2016 godu Rossiia stanet krupnejshim avtomobil’nym rynkom Evropy” [In 2016 Russia will
become Europe’s largest market for cars], Vzgliad, 19 July 2013, www.vz.ru.
http://www.vz.ru/news/2013/7/19/641957.html
Modernization of the Russian Economy Vladislav Inozemtsev
21
from the WTO, which promised significant cost reductions when localising
production. Since the start of the economic crisis, however, the Russian car
market has contracted by more than 45% and costs are not nearly as
attractive as they were before: the same goes for an array of other products
which Western investors sought to make in Russia (white goods, TVs and
radios, construction materials).22 It is not profitable to invest hard currency
in Russia only to sell products on the internal market in devalued roubles.
This just goes to reconfirm a surprising paradox: in a country that is
dependent on exporting raw materials, modernization is only possible
when the price of these exports is at its height. Besides, it is only achieved
in places where the authorities are competent enough to grasp this fact. To
date, only the leaders of the United Arab Emirates have done so.
22. See: D. Lomakin, “Padal, padaet i budet padat’” [“It fell, is falling and is going to fall],
Gazeta.ru, 14 January 2016, www.gazeta.ru.
http://www.gazeta.ru/auto/2016/01/14_a_8021765.shtml
Conclusion
To sum up, modernization is not on the cards at present, with Russia
increasingly alienated from the wider world, oil and gas prices low, the
increasingly ineffective ruling class, and ideology clashing with economics.
Indeed, in the eyes of most Russians, modernization is not even desirable.
The Putin regime’s greatest political “achievement” has been to convince
most Russians that following the course of global progress is not only
pointless but also dangerous for the country. The atmosphere in Russia is
now such that regression and backwardness are interpreted as evidence
that the country is succeeding on its special path. In such circumstances,
discussing modernization is purely theoretical.
Does this mean that modernization will never happen in Russia or, in
a phrase widely repeated during the presidency of Dmitry Medvedev, that
“there is no alternative to modernization”? Both these inferences are
mistaken.
Modernization will certainly become a priority in Russia, but only
after the country has passed through a deep crisis, when the population
experiences something similar to what happened at the beginning of the
1990s, when they fell into poverty; when the political class is finally
convinced that its foreign policy has completely failed; when the country is
on the verge of collapse and the people lose all faith in the “law
enforcement oligarchy.” Modernization will begin when Russians look
ahead and reject the former regime. Since the Kremlin’s current policies
are leading to this sorry end, there is no doubt that modernization of the
economy and of society will occur in Russia, though not any time soon.
On the other hand, in the meantime there undoubtedly is an
alternative to modernization, which consists of preserving the country
intact, a gradual decline in living standards, paralysis of the political
system, an increase in emigration and a stronger role for the state in the
economy. Venezuela shows where such policies will lead. However, if
problems build up relatively slowly, the Russian population is prepared to
put up with them for a long time. Although modernization is bound to
happen in Russia eventually, therefore, one cannot expect it to take place in
the next 10-15 years as a factor in economic and foreign policy.
The Latest Publications of
Russie.Nei.Visions
V. Likhachev, “The Far Right in the Conflict between Russia and
Ukraine”, Russie.Nei.Visions, No. 95, July 2016.
D. Trenin, “Russia’s Asia Strategy: Bolstering the Eagle’s Eastern
Wing”, Russie.Nei.Visions, No. 94, June 2016.
A. Shumilin, “Russia's Diplomacy in the Middle East: Back to
Geopolitics”, Russie.Nei.Visions, No. 93, May 2016.
B. Lo, “The illusion of convergence—Russia, China, and the BRICS”,
Russie.Nei.Visions, No. 92, February 2016.
L. Bisson, “Russia’s Immigration Policy: New Challenges and Tools”,
Russie.Nei.Visions, No. 91.
L. Polyakov, “‘Conservatism’ in Russia: Political Tool or Historical
Choice?”, Russie.Nei.Visions, No. 90, December 2015.
I. Timofeev, E. Alekseenkova, “Eurasia in Russian Foreign Policy:
Interests, Opportunities and Constraints”, Russie.Nei.Visions, No. 89,
December 2015.
I. Bunin, A. Makarkin, “Russia: Business and State”,
Russie.Nei.Visions, No. 88, November 2015.
M. Korostikov, “Leaving to Come Back: Russian Senior Officials and
the State-Owned Companies”, Russie.Nei.Visions, No. 87, August 2015.
V. Milov, “Russia’s New Energy Alliances: Mythology versus Reality”,
Russie.Nei.Visions, No. 86, July 2015.
I. Delanoë, “The Kurds: A Channel of Russian Influence in the Middle
East?”, Russie.Nei.Visions, No. 85, June 2015.
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